Small and medium enterprises (SMEs) are set to profit from the greater issuance of credit by commercial banks in 2021 as the lenders expand their threshold for risk in the New Year.
According to analysts at ICEA Lion Asset Management, banks are set to renew their appetite for risk as they chase a higher return from loan issuance.
“For the first time in five years, we expect private sector credit to hit double digits in 2021. There are a lot of hungry banks out there looking to take opportunities having been starved off high returns under disruptions emerging in the past five years including the rate cap regime and the COVID-19 pandemic,” stated ICEA Asset Manager’s Head of Research Judd Murigi.
At the same time, the resilience of SMEs in meeting loan repayments as planned in contrast with larger corporate banking clients is expected to see the new flow of credit stream in with a bias for smaller businesses.
“We’ve seen a higher rate of non-performing loans by corporate clients as opposed to SME borrowers. We think this provides a key learning opportunity for banks which have traditionally held a high risk perception for SMEs. This assessment needs readjusting.” Added Murigi.
“Banks should look at SMEs on new lenses in light of the resilience demonstrated by SME loan books.”
The rate of loan defaults by SMEs has averaged single digits of between 5 and 10 per cent in recent years while that of corporate clients have deteriorated to double digits in the same period.